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美元升,万物落!投资者请系好安全带

The dollar rises, and everything else falls! Investors, please fasten your seatbelts.

Golden10 Data ·  Jan 16 09:51

The rapid appreciation of the US dollar may jeopardize the latest Earnings Reports season for US stocks and create greater obstacles for overseas economies and financial markets.

As President Trump prepares to return to the White House, the strength of the USD is surprisingly strong. Earlier this week, the nominal trade-weighted exchange rates index compiled by the Federal Reserve was just below 130. According to data from the Federal Reserve and FactSet, this is the highest level since March 1973.

Other indicators measuring the strength of the USD are not as high. FactSet data shows that the ICE USD Index recently broke above 110, reaching its highest level since November 2022. This index measures the value of the USD against its largest Developed Markets competitors, with the euro to USD exchange rate having the largest weight.

However, Macquarie Global Markets strategist Viktor Shvets points out that for investors, the absolute level of the USD against other currencies is not important; what matters is the rate of its appreciation.

"No matter how you look at it, the USD has reached quite a high level," Shvets said.

The recent pace of the USD's appreciation has been quite rapid. The USD index has risen 9% since Election Day and increased 7.7% for the quarter ending last December, according to FactSet data, marking the best quarter performance since the first quarter of 2015.

Given the significance of the USD to the Global economy, such rapid fluctuations could have far-reaching impacts.

According to Shvets and others, perhaps the most direct and obvious impact is on the performance of American companies. In a recent research report, a team of Analysts from Goldman Sachs listed the sectors in the S&P 500 Index that are most vulnerable to the appreciation of the USD based on the percentage of overseas sales of US-listed companies.

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The strengthening of the USD will lead to a decrease in the dollar value of overseas income, thereby increasing the possibility of foreign exchange conversion effects that may prevent companies from achieving Wall Street's sales and earnings targets. At the very least, companies will not exceed their targets as they originally intended.

This could have potentially serious consequences for the US stock market, which is already on shaky ground. According to statistics from Goldman Sachs, the three most vulnerable sectors are Information Technology, Materials, and Energy stocks.

According to Goldman Sachs' analysis of Earnings Reports conference call records, executives did not genuinely consider the impact of a strong dollar in the third quarter of last year. However, given the speed at which the dollar is rising, the impact this time may be much more significant.

"Based on a review of Earnings Reports records, Forex was not a key focus during the third quarter Earnings Reports season. However, we expect management and investors' attention to this issue to increase in the fourth quarter earnings season, consistent with historical periods of a strengthening dollar... In fact, most of the dollar's appreciation occurred in the last few months of 2024," the Goldman Sachs team stated.

Mike Wilson from Morgan Stanley noted in a report earlier this week that the appreciation of the dollar could put greater pressure on the earnings of companies with significant overseas revenue exposure, which could have a larger impact on their stocks. The result may be a "more differentiated performance" among S&P 500 Index constituent companies this earnings season.

Another concern is that a strong dollar may pose greater obstacles to foreign economies and financial markets. Investors have already seen this in the stock market over the past year, with international stocks' performance in USD terms significantly lagging behind their US counterparts, especially when their ROI is converted into USD.

As the strengthening dollar exerts greater pressure on local currencies, other countries may begin to feel more significant burdens, which may limit the ability of monetary authorities to lower interest rates to stimulate domestic demand.

A team of analysts from ING Groep pointed out that Brazilian authorities have already had to spend 30 billion USD of their Forex reserves, and their central bank has also had to raise interest rates to defend the constantly depreciating Brazilian real. FactSet data shows that over the past 12 months, the USD has risen by more than 25% against the real.

Emerging Markets economies are not as easily affected by the strengthening USD as they were a few decades ago. Shvets noted that in the late 1990s, the Asian financial crisis led to a spiraling decline of currencies like the Thai baht, which ultimately had to rely on international assistance to prevent the crisis from spreading. Similarly, in the early 1980s, the strengthening USD triggered a debt crisis in Latin America.

Today, the Forex reserves of Emerging Markets countries are much stronger. Shvets pointed out that their external debt levels are also lower relative to GDP.

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The share of external debt of Emerging Markets countries relative to GDP.

However, he added that the stronger the USD, the greater the likelihood of problems arising somewhere in the Global financial system.

"The dominance of the USD is so high that it dictates Global liquidity, Global capital costs, and Global demand," Shvets said.

Fortunately, Shvets and others indicated that the strengthening of the USD may not last for long.

Over the past year, several factors have contributed to the strengthening of the USD. First, the relative resilience of the USA economy compared to other countries, particularly in Europe and other Emerging Markets. The UBS Group's strategist team stated that the relatively high yields of USA government Bonds and the robust returns of the USA stock market also help attract more foreign investors into the USA market.

One of the most obvious points is that strong USA economic data helped push up government Bonds yields, which in turn supported the USD. Additionally, there are expectations that the Trump administration may implement potentially inflationary policies such as tariffs and mass deportations, thereby strengthening the USD.

The UBS team noted that investors may not fully recognize the potential impact of Trump administration tariffs. However, recent reports from Bloomberg and The Washington Post suggest that the new government will take a more gradual approach to imposing additional tariffs than what Trump implied during the campaign.

More aggressive tariffs may intensify the strength of the USD in the coming months. Nevertheless, UBS strategists believe that the performance of the USD in the first and second half of 2025 may be entirely different, with the USD fully strengthening in the first half and possibly softening in the second half.

The translation is provided by third-party software.


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